Varun: Why should on-premise software companies transition to Saas business in 2018?
Muthu: If not in 2018, which is already too late, it’s going to be never. Any software company that has an established on-premise software have to transition as customers are getting to it. Many IT departments in companies have started looking at more value-added work becoming a strategic partner to business, solving more business problems with technology. To achieve this, they are looking to partner with software companies that can deliver products as a service, with the ability to opt-in and opt-out as required, and not get bogged down in large-scale CapEx investments. Another critical trend is that business departments have their own small software needs, and they would like to use software to solve their specific problems which can be easy only if the software is available in a SAAS basis.
Varun: Why are customers considering SAAS over On-Premise?
Muthu: The world is moving towards seeking service vs. owning and maintaining things. A great example is Uber, where many people have stopped owning cars and started relying on a service model. As long as the service is stable, reliable, trusted, secure and affordable, it becomes the choice. Many years back when I worked at Ford, one of the big strategies was to move the non-core competencies (Accounting, IT etc) to experts, and continue with the focus on innovation in areas that involve your expertise. This is the trend we are seeing across the world, where customers are moving to services based subscription model, then owning things on their own.
Varun: What are the key customer considerations in deciding between SAAS and On-Premise?
Muthu: The big one is the cost savings they get on this, as they don’t have to buy hardware, don’t have to get the software installed and configured, don’t have to commit an upfront license and an ongoing maintenance burden. The flip side of it that they consider is the security aspect, whether moving away from their Premise is going to have a security breach of their data, this is a big consideration. The other big consideration is not to manage software upgrades and getting the new innovations into their software, this one is a big activity and difficult one in On-Premise which gets extremely efficient in SAAS model.
Varun: What are the biggest challenges in moving from on-premise enterprise software to enterprise SaaS business? What can be the key strategies for this transition?
Muthu: There are several challenges , but the foremost would be to figure out how you can transition to become more agile, as the demands of SAAS business is to react faster and ensure the customer stays successful with the software throughout as the business model is more of a services where customer can opt out after certain period in time. For this one of the big area is how the cloud operations would work – how you roll out your software, how you make the updates, how you can ensure all customers stay in the same common release. The best analogy of this is that of a passenger aeroplane, where are services hundreds of them at the same time in the same plane. You don’t have the luxury of running a private jet for a customer where you can customize and offer specific service to a specific customer. Biggest opportunity (more than challenge) is to stay close
to your customer and have an impactful partnership.
Varun: How does development, marketing, sales and support of SaaS services differ from on-premise products?
Muthu: It’s completely different for each of the function when it comes to SaaS. Development has very short release cycles and they are constantly innovating and enhancing the products, so roadmap is super important. You are also having great insights as to how your customers are using the software, which gives you a great basis to prioritize your features. In case of Marketing, there is constant pressure to simplify and ensure the messaging is clear. Especially when new features are coming out rapidly, its very important that they are super agile to incorporate that into the messaging, and help to differentiate against others. Sales again are going to be quiet different as it is no more product sell but consultative services sell. Sales need roles that does sales and post-sales customer success to ensure the continued interest and usage of the software. Support also needs to be more agile, they need to get trained quickly and constantly to be on top of ensuring they give clear support to customers. Pricing is another very key area that is very different.
Varun: What is the typical price point difference between B2B SaaS products and similar on-premise software? How to strategize pricing?
Muthu: Pricing is always the biggest area that changes for a software company when they plan to go to SaaS. It also ensures certain predictability of renewal business which did not exist in the on-premise so much. Offcourse that is subject to customer success and happiness. The typical price point difference from a customer point of view should be measured for Total Cost of Ownership (TCO) and not just based on license cost difference. We see at least 3.x to 5.x annual savings for the customer as they move to a SAAS based model – still the single most driver for someone moving to SAAS. Pricing can be offered through different pricing metrics based on the software such as users, revenue of the company, number of employees of the company, or a flat price per month if it’s a niche software. One of the big trends is to offer the price based on consumption rather than standard metric, which makes it even more challenging to ensure customer usage. But there is no argument to not move to SAAS just because pricing will not yield you the margins that On-Premise software provides, as then you will be left out against the competition. Best way to price is to look for different things such as how customers get
overall TCO savings, what are your competitor’s pricing services at, how your product strategy is flexible enough to adapt to your pricing strategy as that will allow for better opt-in/opt-out based pricing.
Varun: What are the major revenue projecting differences between SaaS and on-premise software?
Muthu: Revenue recognition in SAAS model is completely different from On-Premise. In SAAS, you book your revenue every year as you fulfil the service to your customers whereas in On-Premise you had the luxury of recognizing your revenue once you closed a deal. This is a big difference when you talk about your revenue and financials. But the advantage of this is that you start your year already with confirmed revenue, and don’t have to start with a zero, so there is some reliability on your revenue projections.
Varun: Does transitioning to subscription-based model signal gains for the stock? Why stock market attribute a higher multiple (in terms of revenue vs. valuation) compared to traditional on-premises companies?
Muthu: Yes absolutely. The best thing here is a reliability of revenue coming in from subscriptions, assuming you are staying close to your customers and ensuring continued success and usage. If this coupled with good and efficient cloud operations, it can really be more sustainable and profitable. Also, this ensures that you are innovating constantly – on the product, in the operations, on the pricing models and always innovations give better multiples in stock markets. Well, Customer Engagement is the key in SAASY Business, and it will ensure revenue and therefore higher multiple.
Muthu Ranganathan is a Software Intrapreneur having been working in Product Management for 18 years in Enterprise Software Product companies such as Ramco, Hyperion, SAP Labs and now in Oracle. He has built about 10+ software products in ERP, Analytics, EPM, CRM and other domains. In the past 5 years he has been working on transition and reinventing for the Cloud and SAAS Models. He has also been mentoring Indian Product Startups.
Muthu is a former finance guy, worked in corporate finance at Pepsi, Ford and Arvind. He has a Chartered Accountant and Management Accountant (ICWA) as an educational qualification.